Aussie debt is about to top half a trillion

Thu, 15 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/article-231056138.html 

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Aussie debt is about to top half a trillion dollars

Australia’s government debt is poised to break through half a trillion dollars. As of last week, it stood at $0.4992 trillion.

Half a trillion dollars, is $500,000,000,000.00 of gross debt on which the government will be paying interest of around $15 billion each year – and that assumes that interest rates remain at the current record lows.

Government debt has been on an upward path since the global financial crisis hit the economy in 2008. The GFC saw a significant fiscal stimulus where government spending increased substantially as it delivered enough support so that Australia avoided a recession. It was text book economics but the price of avoiding recession was a rise in government debt.

More recently, structural changes in the economy have seen chronically weak wages growth and below target inflation locked into the landscape. These trends have undermined government revenue at a time when government spending is still running well above the levels prevailing before the GFC. Efforts of the government to cut its spending is recent budgets have not only failed, but spending is actually rising at a strong rate.

As a result of all of this and some reckless pre-GFC policies that wastefully sprayed money around the economy, the budget has been in deficit since 2008-09 and is set to remain in deficit until at least 2019-20. And while ever the budget is in deficit, gross government debt keeps rising.

Half a trillion dollars of government debt is a new record and according to last month’s budget papers, government debt is set to hit $725 billion in the mid-2020s. Government debt was ‘just’ $273 billion at the time of the September 2013 election when the Coalition promised to return the budget to surplus and ‘pay off’ debt. It has failed in this policy.

What is concerning is that the $725 billion debt forecast assumes the budget moves to surplus by 2020-21 and stays there after that, which is a scenario that just about everyone other than Treasury judges to be unlikely For now, the government is having no financial management problems raising debt. Australia’s triple-A credit rating is safe for now, which ensures fund managers and others are willing to finance the ever growing levels of debt at the current level of interest rates.

And while a credit crunch where investors shun Australian government debt is unlikely to show up any time soon, if the level of debt rises at a significantly faster pace than currently forecast and there is a credit rating downgrade or two, investors will be less willing to lend to the government at current interest rates.

In other words, an unexpected debt blow out from already elevated levels because of a slump in housing or protracted weakness in commodity prices or some other issue would not only see debt rising more quickly, but interest costs escalate. At the same time, the Australian dollar would almost certainly fall, and by a large amount, which would push import prices and inflation higher, which in turn would erode living standards.

While the half trillion dollars of government debt is not yet a problem, a point could soon emerge where the government will need to take action to address the debt escalation. It appears that economic growth is not enough to fix the budget and control the debt level.
This means that tax hikes and / or spending cuts will be needed in the not too distant future. This might be best achieved when, one day, the economy is stronger.

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This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/tax-pushed-spotlight-012812764.html 

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Why your tax is about to be pushed into the spotlight

The budget is just a few weeks away. The Federal election is likely within a year.

Over this time, you will be hearing a lot more about tax. Some will claim the tax-take of the government in Australia is high and that cuts in company and personal income taxes are a necessary policy aim. Others will claim a decent amount of tax revenue is needed to fund the services the people demand from government, namely health care, education, roads, defence, pensions and the like. Closing loopholes and getting rid of unfair tax breaks, collecting more tax in other words, will allow billions of dollars to be directed from the wealthiest so that these services can be funded.

All this assumes, quite plainly, that responsible economic policy delivers budget surpluses when the economy is strong and allows for deficits when the economy is soft or downright weak.

But let’s have a look at a few of these claims on tax against some hard and fast facts.

3.85 million new housing loans since the last rate hike

Wed, 11 Apr 2018

The RBA Governor, Phillip Lowe, suggested that when interest rates do increase, it “will come as a shock to some people”.

On this, Lowe is spot on.

It has been 7 and a half years since the last interest rate rise from the RBA which means that those who have taken on debt since November 2010 have only see their interest rate stay the same or move lower.

There are a few fun facts with this development.